Now that 2018 models are in the showrooms, you may be shopping for a new car to purchase for your business. Be aware that if you are self-employed, you can use one of two methods; the actual expense method or the standard mileage rate, to deduct business auto expenses.If you are doing business as an entity taxed as a corporation or a partnership, you must use the actual expense method. Other special rules apply to leased cars.
Although the actual expense method is more work, it could provide a bigger deduction. Here's a quick recap:
- Actual expense method: This encompasses all your expenses: oil, gas, repairs, insurance, tires, registration fees and licenses, as well as a generous Section 179 and/or depreciation allowance. Keep in mind that there a special rules limiting annual write-offs for cars deemed "luxury cars" by the IRS. The deduction is based on your percentage of business use.
- Standard mileage rate method: Alternatively, you can use the IRS-approved standard rate, which is 53.5 cents per business mile in 2017 and adjusted annually. You can also tack on the cost of business-related tolls and parking fees to the standard rate.
Both methods require detailed recordkeeping for business trips, but the standard mileage rate can be less of a hassle because you don't have to keep track of every expense. Nevertheless, the extra work may be worthwhile. In particular, you may benefit from a Section 179 and/or depreciation allowance, including 50 percent "bonus depreciation," in the first year of ownership if you use the actual expense method. With the standard mileage rate, the cost of depreciation is accounted for in the annual rate prescribed by the IRS.
Which mileage rate is best for you depends on your situation. We can help you do the math to find the best tax result.
